The end game is about to begin. On the one
hand you have the noise and rhetoric. Greedy
speculators gouging gasoline prices; mad mullahs
preparing to wipe Israel off the map; bunker
buster bombs and fleets being positioned; huge
demand for oil from the BRIC countries; China's
insatiable thirst for oil; the oil price will head
for $200 a barrel and will never again fall below
$130 ...
On the other hand you have the
reality.
Oil markets The oil
markets are completely manipulated and
orchestrated, and the conductors of the orchestra
have the benefit of having already held a
rehearsal in 2008.
History never repeats
itself, but it does rhyme. This time around it is
not demand from the United States that is
collapsing, but
European Union and
United Kingdom demand, as oil prices in euros and
pounds sterling have never been higher. In the
meantime, the US is awash in oil as domestic
production quietly increases, flushed out by the
high prices.
As I have outlined in
previous articles, the culprit for the high oil
prices between 2009 and 2012 - with the exception
of the speculative "spike" between March 2011 and
June 2011 driven by Fukushima and Libyan price
shocks - has been passive investment by
risk-averse investors, which enabled producers to
support oil prices at high levels.
Much of
this passive money underpinning the market and
enabling producers to monetize inventory pulled
out of the market in September 2011, and another
wave pulled out in December 2011.
What is
now happening is the end game: an orchestrated
wave of noise that is drawing in speculative
money. This is enabling the producers who are
actually in the know to hedge by selling
production forward during what they confidently
expect will be a temporary - and pre-planned -
managed fall in the oil price.
The game
plan The smartest kids on the block knows
that gasoline prices much over US$4 per gallon
will be both deflationary and lethal to President
Barack Obama's re-election chances. So that won't
happen other than briefly.
I am by no
means the only commentator who has pointed out the
complete counter-productivity of these oil
sanctions. The smart kids are well aware that oil
sanctions are completely useless, and simply
enable China to fill its strategic reserves at a
discount to the market price at the expense of
Greece and Italy in particular.
But the US
has been quite happy to let the EU - as useful
idiots - take the economic hit. The high oil
prices caused by all this noise and nonsense are
actually a net benefit to Iran - which rattles its
sabre loudly as elections approach.
The
effect of a managed decline in oil prices to, and
probably over-correcting well through, $60 a
barrel - which is coming fairly soon - will be
extremely beneficial to the US in two ways.
Firstly, it will be catastrophic in
particular for Iran, Russia and Venezuela - not
exactly on the White House party list - whose
hugely oil-dependent revenues will collapse. The
ensuing economic mayhem will open these countries
up to regime change and to rescue plans which Wall
Street will be dusting off.
Secondly, the
US population will be laughing all the way to the
gas station as gasoline prices fall - at least
temporarily - below $2.50 a gallon and release
purchasing power into the economy, thereby doing
the president's re-election chances no harm at
all.
What will then happen is that members
of the Organization for Petroleum Exporting
Countries will panic and genuinely reduce their
production. The Saudis/Gulf Cooperation Council
will again orchestrate the inflation of the oil
price - as they did in 2009 - comfortable in the
knowledge that they have been able to hedge
against this temporary fall in prices at the
expense of the speculators currently pouring in to
the market.
That's the game plan as I see
it of the smartest kids on the block. What could
ever go wrong?
A buyer's
strike Quite clearly, consumer nations,
like everyone else, are in the dark in relation to
what has been going on in the oil market and have
swallowed the populist "greedy speculator" meme.
They are simply unaware of the nature and cosmic
scale of the oil market manipulation that has been
taking place, and as a result have been happily
overpaying for oil for years.
What happens
if they simply refuse to pay these prices?
Possibly a "buyers' strike" by China would
be enough to crater the market. We've already seen
the effect of that on Iran, which has clearly
agreed new terms with China after the latter held
back purchases earlier this year.
Or
possibly speculative short selling of crude oil by
hedge funds funded by Chinese investment? I
pointed out at a rather spooky conference on
"economic terrorism" a few years ago in Lausanne -
which examined ways in which terrorists might make
economic rather than physical attacks - that the
only difference between an economic terrorist and
a hedge fund is motive.
System
fragility The markets in oil have never
been so fragile and susceptible to shocks. Private
inventories of oil are low. The investment banks
interpret this - as they interpret everything - as
a sign of physical demand and therefore as bullish
for the oil price ... oh, and by the way, here are
some oil funds they have to sell you.
The
reason inventories are low is that private
intermediary buyers will only store oil if they
can both finance it and lock in a higher forward
sale price. Bank financing is scarce and getting
scarcer, while forward prices are below current
prices; the result is that inventories are low.
The systemic shortage of finance capital
means that neither physical oil traders nor the
remaining proprietary traders of banks can afford
to take into storage much of the approaching flood
of oil onto the market.
Also, derivative
market risk has become concentrated - since
intermediaries are no longer capitalized to take
it - in centralized clearing houses, which have
for commercial reasons become fragmented silos.
In my view, the steep decline which is
planned could easily get out of hand in a not
dissimilar way to the tin market in 1985 when the
price collapsed - literally overnight - from
$8,000 per tonne to $4,000 per tonne.
We
will then see whether the clearing houses are "too
big to fail" - and ask why, if so, such utilities
are run for private profit?
When, not
if In my analysis, absent a massive, and
sustained, shortfall in oil supplies - which I
cannot see occurring, since all involved have
every interest in ensuring it does not occur - the
oil price will, as I have already forecast, fall
dramatically by the end of this year's second
quarter at the latest. It's not a matter of if,
but when it will happen.
Finally, as an
interesting aside, I have credible reports that
Marc Rich - who got on well with both the Shah of
Iran and Imam Khomeini, and who sold oil from Iran
to Israel for 20 years between 1973 and 1993 - has
recently been seen again in Tehran. I doubt that
this is for the night life, or because he prefers
Tehran air to Swiss: but as a trusted third party
there would be few better placed to act as a
go-between.
Let's hope so. Once the
stultifying political uncertainties of elections
in Iran and Russia are over, things could get
interesting.
Chris Cook is a
former director of the International Petroleum
Exchange. He is now a strategic market consultant,
entrepreneur and commentator.
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